Dave Landry's Market in a Minute - Monday, 12/2/13

[Thierry Martin]

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Quote of the day

William Bernstein, ?When the intelligent investor does some trimming back, he usually feels like a dummy for the next year or two.? (IndexUniverse)

Chart of the day


VNQ Total Return Price data by YCharts

The case for REITs. (John Authers)

Markets

Howard Marks says markets are rich but not bubbly. (Pragmatic Capitalism)

The two biggest worries for investors: the Fed and growth. (Business Insider)

Discounting the talk of a stock market bubble. (Servo Wealth)

The 1990s stock bubble was much crazier than you remember. (Slate)

The risk of the stock market never went away, it just seems like it did. (Price Action Lab)

Companies

Whoever said ?television is dead? has not checked the charts. (Howard Lindzon)

What will the newly spun-off Time Inc. look like? (Term Sheet)

Finance

CLOs are once again a (big) thing. (WSJ)

More signs that risky lending has returned. (Dealbook)

Private equity is sitting on nearly $800 billion in ?dry powder.? (FT)

When activist investors take board seat their loyalties are split. (SL Advisors, Dealbook)

Business development companies (BDCs) are growing and getting riskier along the way. (Dealbook)

Funds

A look at Pimco?s rough year, performance-wise. (Rekenthaler Report)

Why active managers have outperformed of late. (Horan Capital)

How to buy gold and silver at a discount. (The Short Side of Long)

Global

Goldman says sell the Canadian dollar. (MoneyBeat)

Why gold continues to pile up on China?s balance sheet. (FT Alphaville)

Economy

Temp employment continues to rise. (Value Plays)

Some decent economic stats. (Calculated Risk, Capital Spectator)

Can you still have bubbles amidst a balance sheet recession? (Business Insider)

Markets are no longer freaking out about Fed tapering. (Wonkblog)

Remember all those HELOC loans? (smithy Salmon)

Earlier on Abnormal Returns

What you may have missed in our Tuesday linkfest. (Abnormal Returns)

Mixed media

Why are CNBC?s ratings continuing to fall amidst a roaring bull market? (Zero Hedge)

Can you really trade part-time? A look at Ryan Mallory?s The Part-Time Trader. (Reading the Markets)

Charting Bitcoin vs. the South Seas bubble. (Mebane Faber)

Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.

[Thierry Martin]

The transportation sector is the lifeblood of the global economy -- but a glance at a chart of the highs and lows of this cyclical sector can look a lot like the surface of a stormy sea.

Take the Baltic Dry Index, for example -- it began the year at record lows but has more than doubled in the past few months.



Out-of-favor industries attract value investors who are looking for a bargain and this upswing in the index could be the beginning of a trend reversal, as the transportation sector is often seen as a leading indicator. A classic value story is beginning to take shape, and investors are climbing aboard.

Global trade is suffering due the widespread downturn, and the shipping sector has taken a dive from its highs less than a decade ago. Nervous businesses have curbed trading activity, keeping demand for shipping lines low. For 2013, global container trade growth is expected to be around 4.7%, rising to 5.7% in 2014.

That growth is what makes a company that's lowering costs and increasing revenues by 6.4% from the same quarter last year worth a closer look. TAL International Group (NYSE: TAL) is a lessor of intermodal containers used to transport freight by ship, rail or truck.

In an industry where utilization rates average around 95%, TAL stands out with rates over 97%. This means very little capacity is left unused, which gives TAL an impressive return on equity in excess of 20%.

The company is improving margins as well by refinancing several credit facilities in the past quarter. TAL's interest expense fell by $3.3 million, lowering its effective interest rate nearly a full percentage point to 3.8%. Gross margins are in excess of 88%, improving from last quarter's 79%.

TAL prides itself on its high-quality lease portfolio. More than three-quarters of the containers it leases are under long-term contracts averaging 42 months. This gives the company a higher than average utilization rate while also limiting its exposure to potential defaults. Management's strategy of higher quality over quantity has given the company an edge in softer markets where defaults threaten its competitors.

TAL's biggest competitor, Textainer Group Holdings (NYSE: TGH), is similar in many respects and should also benefit from improving international conditions. There are slight differences in valuations and utilization rates, but TAL is currently the better company.

Textainer missed earnings last quarter by an extraordinary 29% mostly due to a number of lease defaults by several clients. That debt will keep Textainer from posting better earnings for the foreseeable future, but the stock should improve considerably when the debt is paid.

TAL trades at just 12 times earnings and has had earnings per share (EPS) growth of around 27% for the past five years. The stock offers a dividend of $2.80 a share, an increase of 172% since 2010. The dividend yield of 5.1% is supported by a payout ratio of just 44%, giving the company plenty of capital to continue to invest in the business.

[Thierry Martin]

The head-and-shoulders (H&S) top is one of the best-known patterns in technical analysis. This pattern was first written about in 1930 by a financial editor at Forbes magazine who described how the H&S forms and how it can be traded.

Many readers are familiar with the H&S pattern. On a price chart, there will be three peaks in price at the end of the uptrend, with the center peak (the head) being higher than the other two. The peaks on the sides (the shoulders) should be about equal in height.

Connecting the bottom of the peaks gives us the neckline, and breaking the neckline is the sell signal. Real H&S patterns rarely resemble the precise line diagrams seen in books, and the chart below shows one that occurred in real market conditions. The shoulders are nearly, but not quite, the same height.

[Thierry Martin]

If demographics is destiny, then America?s future looks bleak. At least, that is the inevitable conclusion if demographics is your only consideration.

I have long been a fan of demographic investing, which creates opportunities for traders to execute on what I call ?intergenerational arbitrage?. When the numbers of the middle aged are falling, risk markets plunge. Front run this data by two years, and you have a great predictor of stock market tops and bottoms that outperforms most investment industry strategists.

You can distill this even further by calculating the percentage of the population that is in the 45-49 age bracket, according to my friend, demographics guru Harry S. Dent, Jr.

The reasons for this are quite simple. The last five years of child rearing are the most expensive. Think of all that pricey sports equipment, tutoring, braces, first cars, first car wrecks, and the higher insurance rates that go with it.

Older kids need more running room, which demands larger houses with more amenities. No wonder it seems that dad is writing a check or whipping out a credit card every five seconds. I know, because I have five kids of my own. As long as dad is in spending mode, stock and real estate prices rise handsomely, as do most other asset classes. Dad, you?re basically one giant ATM.

As soon as kids flee the nest, this spending grinds to a juddering halt. Adults entering their fifties cut back spending dramatically and become prolific savers. Empty nesters also start downsizing their housing requirements, unwilling to pay for those empty bedrooms, which in effect, become expensive storage facilities.

This is highly deflationary and causes a substantial slowdown in GDP growth. That is why the stock and real estate markets began their slide in 2007, while it was off to the races for the Treasury bond market.

The data for the US is not looking so hot right now. Americans aged 45-49 peaked in 2009 at 23% of the population. According to US census data, this group then began a 13-year decline to only 19% by 2022. This was a major reason why I ran huge shorts across all ?RISK ON? assets six years ago, which proved highly profitable.

You can take this strategy and apply it globally with terrific results. Not only do these spending patterns apply globally, they also back test with a high degree of accuracy. Simply determine when the 45-49 age bracket is peaking for every country and you can develop a highly reliable timetable for when and where to invest.

Instead of poring through gigabytes of government census data to cherry pick investment opportunities, my friends at HSBC Global Research, strategists Daniel Grosvenor and Gary Evans, have already done the work for you. They have developed a table ranking investable countries based on when the 34-54 age group peaks?a far larger set of parameters that captures generational changes.

The numbers explain a lot of what is going on in the world today. I have reproduced it below. From it, I have drawn the following conclusions:

The US (SPY) peaked in 2001 when our first ?lost decade? began.
Japan (EWJ) peaked in 1990, heralding 20 years of falling asset prices, giving you a nice back test.
Much of developed Europe, including Switzerland (EWL), the UK (EWU), and Germany (EWG), followed in the late 2,000?s and the current sovereign debt debacle started shortly thereafter.
South Korea (EWY), an important G-20 ?emerged? market with the world?s lowest birth rate peaked in 2010.
China (FXI) topped in 2011, explaining why we have seen three years of dreadful stock market performance despite torrid economic growth. It has been our consumers driving their GDP, not theirs.


The ?PIGS? countries of Portugal, Ireland (EIRL), Greece (GREK), and Spain (EWP) don?t peak until the end of this decade. That means you could see some ballistic stock market performances if the debt debacle is dealt with in the near future.

The outlook for other emerging markets, like Russia (RSX), Indonesia (IDX), Poland (EPOL), Turkey (TUR), Brazil (EWZ), and India (PIN) is quite good, with spending by the middle age not peaking for 15-33 years.

Which country will have the biggest demographic push for the next 38 years? Israel (EIS), which will not see consumer spending max out until 2050. Better start stocking up on things Israelis buy.

Like all models, this one is not perfect, as its predictions can get derailed by a number of extraneous factors. Rapidly lengthening life spans could redefine ?middle age?. Personally, I?m hoping 60 is the new 40.
Immigration could starve some countries of young workers (like Japan), while adding them to others (like Australia). Foreign capital flows in a globalized world can accelerate or slow down demographic trends. The new ?RISK ON/RISK OFF? cycle can also have a clouding effect.

So why am I so bullish now? Because demographics is just one tool in the cabinet. Dozens of other economic, social, and political factors drive the financials markets.

My theory is that Ben Bernanke got a hold of the best selling book, The Great Crash Ahead: Strategies for a World Turned Upside Down, by Harry S. Dent, Jr. and Rodney Johnson, and thought to himself, ?Yikes, I better do whatever I can to offset this demographic drag or we?ll all be toast.? Thus followed his ultra low interest rate policy and unending waves of quantitative easing. So far, Ben has been pretty successful.

What?s more, Ben?s replacement, my friend Janet Yellen, will carry on Ben?s mission to stave off a demographic disaster until 2022. Then the demographic headwind veers to a tailwind, setting the stage for the return of the ?Roaring Twenties.?

To buy Harry Dent?s insightful tome at Amazon, please click here. By the way, Australian readers should take note that we will be touring the Land Down Under to debate exactly these issues in February, 2014. Dates and times will be forthcoming.

In the meantime, I?m going to be checking out the shares of the matzo manufacturer down the street.

[Thierry Martin]

The Chart of the Day is Elan Corp PLC (ELN). I found the stock by sorting today's New High List for frequency and the stock advance is 21 of the last 21 sessions! Since the Trend Spotter signaled a buy on 8/16 the stock gained 20.63%.

It is a specialty pharmaceutical company focused on the discovery, development and marketing of therapeutic products and services in neurology, acute care and pain management and on the development and commercialization of products using its extensive range of proprietary drug delivery technologies.

[Thierry Martin]

In today's energy market, investors often try to distinguish between oil plays and natural gas plays, but the distinction is often moot -- most of today's wells produce a healthy amount of both.

The key to finding winning investments is to focus on the relative productivity of a firm's well.



Let's focus first on natural gas (we'll shift the discussion to oil in a moment).

The natural gas market appears to have settled into long-term equilibrium. You'll surely see short-term spikes in prices when the weather gets especially cold (as increasingly appears to be the case this winter).

But unless we have strongly overestimated that amount of untapped oil and gas remaining in our shale regions, then supply increases will be the likely result of any upward move in natural gas prices.

As a result, gas prices may move into the $4 to $4.25 per thousand cubic feet (Mcf) area, but much more upside than that is unlikely. In fact, the natural gas futures market doesn't anticipate a move up above the $4.50 mark until January 2019.



To be sure, gas prices in the $3.50 to $4.50 range explain why share prices of many gas producers remain in a funk. But even at these lower prices, some gas producers are extremely profitable. And it's all about geography.

As geologists have come to realize, some shale regions produce gushers with very little drilling effort. That helps keep expenses very low and enables firms operating in these areas to make ample profits even if gas prices fall to the lower end of the price range noted above.

The most productive shale regions in terms of natural gas production: the Haynesville and Marcellus shales. According to a recent report by the Energy Information Administration (EIA), these two regions are seeing robust output from every new well deployed. "Drilling productivity has increased 50% annually in the important Marcellus gas play and 30% annually in the Haynesville play," notes Barclay's Tom Driscoll in a recent report.

Driscoll thinks the productive output in the Marcellus Shale is leading to solid output and profit gains for Noble Energy (NYSE: NBL). (Incidentally, I am a big fan of this company, thanks to its additional exposure to exposure to massive natural gas fields off of the coast of Israel.)

Changing Dynamics In Oil Productivity

[Thierry Martin]

This month, the International Energy Agency released the 2013 version of its annual World Energy Outlook. Not surprisingly, the horizontal oil boom that has given birth to an oil production renaissance in the United States played center stage in the report.



However, some of what the IEA had to say about the U.S. horizontal boom may have caught some people by surprise.

The IEA sees the horizontal boom making the U.S. the world's largest oil producer by 2015. No surprise there -- the media is all over that story.

But the IEA also said that the horizontal oil boom will peak by the year 2020. (But it's only just begun!) After 2020, the IEA sees American production hitting a brief plateau before heading back into permanent decline. That doesn't sound like an oil boom -- in the grand scheme of things, it's barely a blip on the long-term radar.

I don't entirely agree with this view from the IEA, which I think massively underestimates the entrepreneurial spirit of the energy industry.

After all, the renaissance in U.S. oil production wasn't led by supermajors like Exxon (NYSE: XOM) and Chevron (NYSE: CVX) -- it was led by the independent producers that brought innovation and an entrepreneurial spirit to the problem of producing oil from tight and shale oil reservoirs.

While the supermajors were off looking for oil deep under the ocean and in unstable countries, companies like EOG Resources (NYSE: EOG) "cracked" the shale oil code back here in the United States.

Along with cracking the code, these companies also locked up big acreage positions in the best horizontal oil plays. That real estate is going to reward them for decades.

EOG has large land positions right in the heart of both the Bakken and Eagle Ford oil plays. Over the past five years, this has allowed for a great run of production and reserve increases for the company.

What I think the market doesn't appreciate about EOG and other horizontal oil producers is that their best days are still in front of them.
This horizontal boom is still young, and the technology and techniques being applied are changing quickly. Given the amount of oil trapped in these horizontal oil plays, small improvements in technology and best practices can result in huge increases in the amount of oil these plays ultimately produce.

Let's consider EOG and its Eagle Ford assets. Initially in 2010, with well results and technologies then available, EOG thought it would be able to recover 900 million barrels from its Eagle Ford acreage in South Texas. Things have changed since then.

Last year, EOG said that instead of 130-acre well spacing, the optimal well spacing will actually be 40 to 65 acres. More wells per acre means that more oil can be recovered. Thanks to this tighter spacing, EOG expects the amount of recoverable barrels in its Eagle Ford acreage will actually be 2.2 billion barrels -- a mind-boggling increase of 1.3 billion barrels.

In the Eagle Ford, EOG is sitting on 27.9 billion barrels of oil. The initial assessment of 900 million recoverable barrels assumed a recovery factor of less than 4%. Even with disclosed increase to 2.2 billion barrels, that recovery factor is still under 8%.
For investors, the key is to focus on the companies that own the land that has the oil in place. EOG has a lot of that land and in exactly the right places.

Risks to Consider: The main risk to any commodity producer is the price of the commodity it produces. EOG's revenues are weighted toward oil, so any drop in the price of that commodity will directly impact cash flows and reserve values.